Unwinding Malinvestment

Malinvestment can happen when incentives, like low costs of credit or an increase in the money supply, allocate more resources to an area of the economy than would naturally occur without the incentives.  When the subsidizing begins, the everyday person loses the price signals that help them make better decisions.  Once malinvestment happens, the correction can be brutal because the area subsidized must unwind and return to its natural state.

When you read those words, just think about the housing market a few years ago and your friends that worked supporting the housing and building industry (builders, construction workers, real estate salespeople, mortgage originators, bank employees, FANNIE MAE, FREDDIE MAC,…).  Were they working like mad men a few years ago?  Are they working today?

We are in the process of unwinding the boom artificially created by incentives and it may take years.

One alternative to the unwinding of the malinvestment, and the policy our country is currently supporting, is to keep fueling the problem with additional resources.  When reading the previous sentence, think about TARP, stimulus bills Congress passed, and the low interest rates the Federal Reserve Bank maintains.

So, is the stimulus working?  Of course not.

For the last few weeks I have been listening to Trey Parker, Matt Stone, and Robert Lopez’s Tony Award winning musical, “The Book of Mormon”.  In the story, our lead character is pining to be sent to Orlando and its fake environments for his mission.  Instead, he is sent to Uganda and must face a reality that he may not like.

Unwinding malinvestment is a reality that really hurts.

Read Professor Mario Rizzo‘s column to learn more about the problems and the challenges we still face.  http://thinkmarkets.wordpress.com/2011/06/13/we-told-you-so/#more-4620

Advertisements

About Christopher Hessenflow

Christopher Hessenflow is a financial planner in the Chicago area. He works with all sorts of people who are much more interesting than he is. He enjoys his career which lends him time to think and, sometimes, be creative. Chip was born bald.
This entry was posted in Uncategorized. Bookmark the permalink.

One Response to Unwinding Malinvestment

  1. But there is insufficient demand. Please, these people who can’t figure out that capital is heterogeneous and Say’s Law are going to try to pretend that they know what a sufficient level of demand is? These people are so full of themselves. Nice post! I liked it on StumbleUpon.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s